The historical cost in accounting is important for the organisations. The students pursuing their accounting courses should be aware of the importance of historical cost and information. For that, the universities give assignments of historical cost information. The accounting assignment help expert at My Assignment Services will explain everything you should know to write these historical cost assignment answers.
I will take up a sample of the question and then explain to you everything one by one as I would have done it in the assignment.
The step by step explanation has been given below.
The question says that historical cost information is not a reliable method when the market price is increasing. You have to explain this.
To write the assessment answer for this one, you need to first check the quote of Chambers (1966) so that you can get the context in which it was said.
Then, you need to first mention what is historical cost and why historical cost accounting is important for accounting professionals. The historical cost is mentioned in the financial statement of the company. The original price at which the company acquired an asset is called the historical cost. For example, the company purchased a piece of land 30 years ago for a $1000 whose cost today is $300,000. The historical cost of the asset will be $1000.
You need to write if you agree with the statement or not with valid reason. If you think that historical cost is not a reliable method, then you need to agree with the statement with reasons and supporting evidence of secondary data.
The biggest strengths of using the historical cost accounting method are -
It can be verified. With this, I mean that when the company purchases an asset, the price and details of the purchase are always documented. These can be in invoices, payment, contract or any other method. So, any time in the future when you want to verify the cost of the asset at the time of purchase, you have sources to check that.
Historical cost accounting is useful when you need to find out the depreciation expense. The depreciation expense is the part of the cost of the asset that the company is using in the year it is being valued. To calculate how much the value has depreciated, they are deducted from the historical costs as mentioned in the balance sheet.
The weaknesses of historical cost accounting are -
The value of the asset reflected in the balance sheet is not the actual value of the asset owned by the organisation. The real value may be higher or lower than from the time the asset was acquired.
When the profits are being calculated, the value obtained will differ from what the value should have been. The measurement of profit is done from the capitals at different dates. When we are not updating the cost of the asset, the profit can be a result of comparing two meaningless totals.
Current value accounting is, professionally, known as the market-to-market method. This approach focuses on the current value of the asset. The companies use fair value accounting when they have to estimate the value of their asset at the time of their sale.
The fair value accounting suffers a lot when the changes in the market value are too abrupt and frequent. Here, the historical cost accounting value remains the same.
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